An electronic display in Shanghai’s business district shows the performance of China’a two main stock market indices. Photograph: Aly Song/Reuters
Chinese stock markets plunged on Friday as investors rushed to sell over fears that frenzied buying in recent months had sent share prices to unsustainable levels.
The Shanghai composite index, which reached a post-crash record of 5,166 earlier this month, has since lost nearly 1,000 points, down more than 7% at the last session to 4,193. The CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 7.9%.
Shanghai index – performance over one year
The mass sell-off comes after six months of soaring share prices that saw the Shanghai composite more than double its value since the beginning of the year.
Analysts said rocketing share values on China’s main stock markets, including Hong Kong’s Hang Seng, were the result of a switch away from property investment following a clampdown by the government on excessive lending by banks.
Laws liberalising the stock market also made it easier for funds to invest and for firms to offer shares to the public for the first time. The last six months have seen a record number of businesses listed on the Shanghai and Shenzen exchanges.
According to Reuters data, in the first two weeks of this month around 1.4 million new investors a week flocked to the stock market, helping pump up prices.
Diana Choyleva, a renowned China analyst at Lombard Street Research, said Beijing viewed a stock market bubble as preferable to a housing market bubble.
The authorities have clamped down on lending to property developers and households keen to get on the property ladder to prevent an already soaring market getting out of control.
“Property price inflation is more dangerous because it is socially divisive, increasing the wealth of the rich while making it even harder for the less fortunate to clamber onto the property ladder,” she said.
China’s premier, Li Keqiang, intervened to say the economy’s fundamentals were good and major indicators were improving. He told the state-owned China Central Television that the cooling property sector had slowed growth, but “the main economic indicators such as industrial output, investment, consumption, exports and imports have stabilised and showed improvements since May.”
Further falls in China stocks are expected to send ripples throughout Asian markets, according to the investment advisor Rivkin. Investors fear another mass sell-off if eurozone negotiators fail to reach a deal with Greece.
Capital Economics said the slide could knock 1 percentage point off China’s GDP, which Choyleva estimates is around half the official measure of 7%.
“Traders and investors are very much on tenterhooks on the outcome [of talks on Greece],” Ben Le Brun, a market analyst at OptionsXpress in Sydney, told Reuters.
Markets are expected to get a boost next week when new rules come into force allowing funds that invest in mainland markets to trade more easily in Hong Kong. The integration of Chinese markets is expected to trigger a steady flow of investments into both markets, easing the pressure from the recent falls.
“When mainland investors invest offshore, they will not buy something that is totally alien to them, but Chinese equities whose names they are familiar with,” said Franco Ngan, the chief executive officer at Zeal Asset Management in Hong Kong.
It is also a good time to invest in Hong Kong stocks as H-shares are at deep discounts to China’s A-shares, said Ngan, whose firm has a $300m Greater China equity fund that will apply for mutual recognition in July.